Chapter 8- Business Combination

by • 10/06/2011 • B.COM PART 1 Introduction to BusinessComments (1)1481

Q1- What do you mean by business combinations? Discuss its kinds.

Business Combination

Business combination come into existence when two or more independent business firms are combined for a common purpose.

KINDS OF BUISNESS COMBINATION

Business combinations are formed by the following methods

1.   Merger

2.   Amalgamation

3.   Holding companies

4.   Subsidiary companies

5.   Trust

6.   Pool

7.   Cartel

8.   Syndicate

9.   Licensing

1.   Merger:

It is one of combination a firm takes over other independent firm of firms such that taken over firm or firms lose their existence. The process can be explained by the following equation:

A+a+b = A’

Where,

A = buyer company or firm

a = taken over company or firm

b = taken over company or firm

In merger, the buyer company is usually more popular than the taken over companies and hence the former keeps its name alive.

2.   Amalgamation:

Under it two or more independent firms are combined such that they all lose their previous separate identities and are converted into a new one. This type of combination can be explained by the equation given below.

A+B+C = D

Where A, B and C companies are independent companies amalgamated into D, a new company. Amalgamation takes place when all combining companies are not quite famous as such they are willing to give up their names and identities and adopt new one.

3.   Holding Companies:

This concept refers to that combination under which all companies involved retain their separate identities. However, the firm that initiates the process is known as holding company and taken over companies are referred to as subsidiary companies. The process can be explained by the following equation.

(A) + B + C = (A) + b + c

Where,

(A) = Holding Company

b = The subsidiary company

c = The subsidiary company

4.   Subsidiary Company:

These are the companies owned by the holding company, but enjoy their own separate entity. The holding company may retain from 51 percent to 100 percent shares of the subsidiary company and have acquired its whole control of management, that is, it nominates the board of directors.

The position can be shown in equation as under:

(A) + B + C = (A) + b + c

According to this equation (A) is holding company and B and C are the independent companies before merger. After (A) acquires the majority of shares of B and C they become the subsidiary company of (A) as shown in the second half of the equation as b and c.

5.   Trust:

Trust is quite different from merger, amalgamation, or holding companies where ownership are transferred. Here all firms keep up their respective ownerships and entities. Trust is created by an agreement among competing companies to kill competition. It is used to fix prices of their goods and services and earn maximum profit. In the US trust are banned.

6.   Pool:

The pool comes into being to avert competition among business firms dealing in identical goods. These competing companies enter into a written agreement to achieve following criteria:

  • Fixation Of Minimum Profit Level: Every member company is required to earn at least a certain level of profit, and if it fails it will be ousted from the group.
  • Fixation Of Minimum Prices: Every fir is required to fix a minimum price for its particular product, that is, the price should not come down a certain level. However, prices may be charged higher.
  • Allocation Of Areas: Market areas are divided and allocated to different companies to avoid their concentration on a few markets. This allocation facilities the companies to monopolies the market, kill competition, fix maximum pries, earn highest possible profit.
  • Limit On Production: Production limit at a lower level is fixed to control the supply, keep prices at higher level and avoid competition.

The member who fails to achieve the above targets is expelled from the pool. The U.S. has banned pools in any forms within the country.

7.   Cartel:

It is a form of pool found outside the US. Big cartels are established in a great number of industries including diamonds, zinc, coppers, tin, and rubber. They fix the amount of production, price, and distribution etc. for their products to facilitate monopoly and maximize profit.

8.   Syndicates:

Two or more persons or organizations can establish syndicate with a view to making up the shortage of funds or where a person or a firm is not willing to contribute a large sum to the business. Syndicates are formed for obtaining large amount of capital which is used for accomplishing a particular giant project. Once the objective is complete the syndicate is dissolved.

This system of grouping for financing a project is very popular and common among banks which form financial syndicates to provide loan to the third world countries.

9.   Licensing:

Licensing is an agreement between two companies, one being the principal company allowing the other to manufacture or sell former’s products. The company issuing the license is referred to as licenser and the receiving company as licensee which pay royalty to the former.

Licensing method is used by the multinational companies to enter foreign markets the culture of which they are unaware.

Q2- Why Business combinations?

Or

What are the reasons of Business combination?

Or

What factors responsible for Business combination?

 

Following are the factors which are responsible for different Business combination.

1.   When Firms Sustaining Loss:

Business combinations are form for reduction of process or when firms sustaining heavy losses its need to make a combination to reduce the losses under absorption and amalgamation.

2.   To Form Large Capital:

In the case of amalgamation firm usually merge to form larger finance as per business requirements. By merging two or more firms several times liquidating business turn to success.

3.   To Create Monopoly:

Some of the larger enterprises merge their business to reduce the competition and to gain heavy profits. Cartel, pool, and trust are the examples of monopoly.

4.   For Completion Of Project:

Many times under joint ventures firms are combine their approaches to complete a project. One party can provide the finance and another one can provide machinery and labor.

5.   To Control Management:

Holding companies and subsidiary companies are merge their business to control the entire management under one tree. Holding company execute instruction that must followed by the subsidiary company.

6.   To Spread The Business:

Some giant firms spread their businesses by selling their goodwill and standards to the external parties. Franchise is the example of standards followed by franchisee.

7.   Use Of Technology:

Use of new technology is the result of business combination because a single unit can not use the new technology.

8.   To Face Crises:

Business or small units combine themselves to face the crises. It is very difficult in modern era that small industrial unites face the inflation and deflation. So they combine themselves to over come these problems.

9.   Tariff Facilities:

Industrial units of the country combine themselves in order to protect the home industries from cut throat competition. Government also provides protection and tariff facilities. In this regard government imposes heavy duties to protect domestic products.

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